What’s the Deal with Oil in Sudan?

by andrewcagle

The Brief

On Monday, a decision was made by the cabinet of South Sudan to shut off the nation’s oil production. The headline of this week’s New Times, a weekly newspaper published in Juba, reads “Oil pipe: Shut it, says Atem agrees”. So far the Sudan Tribune is relaying reports that the governors of South Sudan’s oil producing states are following in suit with Juba’s decision. The drastic action, supported by President Salva Kiir Mayardit, was triggered in response to what South Sudanese leaders call oil theft by the Khartoum government in Sudan. Last week, South Sudan accused Sudan of loading three tankers in the Port of Sudan with South Sudanese crude oil totaling $815 million in value. In recent months, the government in Juba has been complaining of overly high transit fees for use of the North’s pipeline to the Red Sea, the only means of export for South Sudanese oil.

According to a Reuters report, South Sudan’s top negotiator has said that, “South Sudan would resume production if Sudan immediately paid the value of ‘stolen or confiscated’ oil at the sales price contracted to purchasers, agreed not to block vessels coming to load oil, and met other conditions.” The leaders of Sudan and South Sudan have agreed to meet in Addis Ababa to solve the dispute, but there are no visible signs of progress so far.

Talking Numbers

Two-thirds of Sudan’s oil fields are located in the South, which came under complete control of South Sudan on July 9, 2011. These fields also account for 75-80% of daily production. Independence for South Sudan in July also ceased revenue sharing between the two Sudans, cutting approximately 40% of Sudan’s federal income. The easy solution for Khartoum is to raise transit fees to compensate for as much of the new income deficit as possible. The New Times reports that South Sudan currently pays “between $5.5 to about $7 per barrel” and that “the north wants to add an additional $32 per barrel, including transit fees of $22.8 per barrel.” With Brent crude prices hovering around $110 per barrel, and a new fee of $37.5 to $39 per barrel, South Sudan would spend approximately 35% of potential oil revenues on transit fees to the North. In December, South Sudan was reporting production of 350,000 barrels a day. This equates to $13.3 million a day in transit revenues for Khartoum.

Sudan has a monopoly on their oil transit route and owns exclusive rights to its operation. Two questions arise. One of morality and another of legality. Generally, tariffs and fees for pipeline use are negotiated by regional governments or bodies and agreed upon before operation. Tariffs are widely cost-based and cover cost of pumping, insurance, and other maintenance cost. Cost of initial investment is usually excluded. So far, I have not found any existing agreements on transit fees between the two nations. In June of 2011, Salva Kiir did set up a committee to market South Sudanese oil and explore alternate export routes.

Is Sudan Charging Too Much?

The 35% is high for a pipeline tariff, but in 1975, Iraq paid 26% of the crude oil market price to Syria and Lebanon for transit to terminals on the Mediterranean according to their agreement. At the same time, in 1995, clients of the Express Pipeline in the US had much cheaper options offered as 5, 10, and 15 year contracts. The toll for a 10 year contract was $8.177 per cubic meter of gas (or 6.3 barrels of oil). This fee translates to $1.29 per barrel, or 7% of the market price of a barrel which averaged at $16.75 in 1995. Obviously, I am not an expert in economics or petroleum policy, but from other case studies found, tariffs tend to be closer to the 7% number and not the 26%. Each transit system is also different. Sudan has no regional pipeline competition to lower prices and operates a lengthy pipeline through harsh and remote terrain. Still, I would not leave those factors to justify a 35% tariff on South Sudanese oil exports. Ukraine’s Naftogas charges $9.50 per ton of oil pumped through its pipeline.

Implications and Decision Making Factors

It is no doubt that Sudan is motivated by a desire to continue its dominance over the South. It also expresses concerns that South Sudan’s oil revenues are funding and arming opposition groups on the North. The South strongly denies these charges. Bashir has showed no indication of slowing his genocidal ambitions to cleanse Sudan of all non-Arabs. Any armed resistance in Sudan’s border states is in response to a months long bombing campaign against ethnic black Sudanese in South Kordofan and Blue Nile states. Khartoum is also likely not ready to deal with the shortfall in income, and has figured it can strong-arm the money it needs. Where Bashir went wrong was underestimating South Sudanese national pride. Juba takes any and all attempts by Khartoum to assert control or dominance personally and politically. For a nation having just suffered decades of war and genocide, the South Sudanese are holding fast to their new freedom and independent stature.

While the bold nature of South Sudan’s quick decision may have some wondering why other avenues of resolution were not explored before a shut-down, the action underscores how serious leadership in Juba views the issue. 98% of the nation’s income comes from oil. South Sudan has no tax system or any means of income besides extorting outrageous visa fees and import fees. The country is in desperate need of development, especially in infrastructure. The big question is, how long will oil production remain at a halt? The government will need to apply for loans or go deeper into debt. This week South Sudan signed an agreement with Kenya to build a pipeline to a port on the East Africa coast. Problem is, some say the project could take three years to complete. In the meantime, the two Sudans will have to come to an interim agreement on transit fees.

Shutdown of the country’s oil production is a big deal, but I would question the immediate tangible impact on everyday citizens. The South has been sharing oil revenues since 2005 and reaping near full revenues since July. Despite this fact, the only only paved highway in the country is currently 2/3 to completion. Furthermore, it is financed by USAID, no the Government of South Sudan. South Sudan has less than 68 miles of paved roads. Private schools still outnumber public schools, and fees are still required even for government run schools. Most water wells are drilled by NGOs. Citizens see almost no public goods and services besides military and police, which are still largely ineffective and plagued by corruption and right abuses. While this goes on, government officials take in large salaries (usually retired generals or powerful men from the majority Dinka tribe.) In September, asked a man in Juba what he though the most important and untold story was in South Sudan. He said corruption. Par for the course in Africa.

Final Thoughts

Officials in Juba also need to bear in mind that oil will be a key source of revenue for development in South Sudan. Oil reserves are projected to be halved by 2020. Oil production in Upper Nile, which holds the largest reserves, peaked in 2010. Production in Unity State peaked in 2005. Any large scale development the nation has planned needs to be done within the next 10 to 20 years. Development also takes time, and people in South Sudan eager but not impatient. Most people I talk to are proud to be South Sudanese but are reluctant to put much faith in government. Some have said they don’t believe South Sudan is a democracy. They are right. The best measurement of civil society here is a nation currently run by a military regime trying to figure how to be a legitimate government. The real test for South Sudan’s success will be to establish and effective and representative government while the window for economic development and growth is open wide enough.

While NGOs and international bodies rush in to take on aid and development here, the government cannot become dependent. In the realm of politics, and the current oil dispute, leaders in Juba should not overestimate the ability or interest from the international community to help. The US is busy fighting the longest war in its history and facing domestic issues, all during election season. Europe has its hands full with its Euro and debt crises. The biggest allies and partners in this issue will be the East African Community and China. Their friendship and China’s thirst for oil may be enough to acquire short term stability to ensure long term peace and stability.